Friday, November 04, 2011

There is no way that printing money or standard "austerity" measures can overcome the structural friction crippling economies such as Greece and Italy--or those of the U.S., the rest of the E.U. and China.

If we set aside the absurdist headlines about various "rescues" of insolvent governments, we might focus instead on a larger question: how much of the Greek and Italian economies is useless friction? How much of the U.S. economy is useless friction? How about economies like China and India that are rife with corruption at every level?

The question matters because friction will seize up a machine once the energy devoted to overcoming it drops below a critical threshold. It seems painfully obvious that Europe is about to reach that threshold, the U.S. is getting close and China is teetering on the precipice. Once those three seize up, then the rest of the world will follow.

Behind all the headlines of rescues, bailouts, austerity packages and all the rest of the propaganda spewed out by eurocrats and their media lackeys, let's ask the question no one dares ask: what if the entire European Union bureaucracy is nothing but friction? If so, then the E.U. isn't the "savior" of the Eurozone economies, it is the cause of their systemic ills.

Let's explore the analogy of friction a bit.

Friction is the resistance between moving parts that cause a bicycle in motion to come to a stop once you stop pedaling. If you flatten the bike’s tires, increasing the resistance between the rubber and the road, that increase in friction causes the bike to slow far more quickly than a bicycle with inflated tires. Increase the friction enough, and you can barely push the bike forward.

Though friction cannot be eliminated entirely, it can be reduced to the point that very modest amounts of energy create substantial results. Alternatively, friction can increase to the point that the energy input required to maintain output rises far beyond the value of the output. At that juncture, the system freezes up. The returns are so marginal that they no longer justify the energy and expense needed to maintain the machine.

A bicycle with wheels that barely turn will be tossed aside when the rider realizes he can go faster by walking -- and with much less effort.

How Much of the US Economy is Friction?

Economies have friction, too. When the friction increases to the point that much of the economy’s energy and surplus are being consumed in overcoming systemic friction, then the system will eventually freeze up and be abandoned.

How much of the U.S. and other global economies is friction? It is a difficult question, as we’ve grown so accustomed to our way of doing things that we tend to assume that the present system is the most efficient one possible. If it is visibly inefficient, that we assume it serves a social need so vital that its maintenance overrides the high costs of maintaining the system.

Much of our faith is based on the belief that because we live in a market economy, the efficiencies intrinsic to a market economy -- such as customers gravitating toward the goods and services that offer the lowest costs and highest benefits -- are being effectively captured by the US economy.

But this is mostly wishful thinking, the net result of ceaseless self-promotion by the Status Quo that benefits from the enormous friction that is, in fact, grinding down the US economy. In actuality, market forces influence very little of the US economy, and what they do influence is a series of carefully limited false choices constructed by non-market forces and the immense powers of marketing.

Ten Doctors, Twelve Billing Clerks

Since some 18% of the US economy is devoted to health care (or what I call sick care, due to its perversity), let’s start with an example of massive friction in the US sick-care system. I recently received an email from a physician (one of many I get from doctors and nurses) who noted that his group has ten doctors and twelve billing clerks who do nothing but fill out forms and try to collect payments from various insurers and agencies.

Note that this does not include care-giving support staff such as nurses or assistants, or general-overhead staffing who handle bookkeeping, accounting, tax preparation, reception, scheduling, janitorial, legal services, etc. It also doesn’t include the cost of malpractice insurance coverage or the hidden costs of “defensive medicine” (that is, the practice of medicine aimed at minimizing lawsuits or thwarting a future claim of malpractice).

Regardless of your political ideology (if any), common sense requires us to ask what the billing-department costs would be in a single-payer or cash-only system. Common sense also requires us to ask whether the enormous cost of billing -- which includes claims, counter-claims, adjustments, revisions, negotiations, disputed settlements, regulatory filings, lawsuits, and fraudulent claims, to name but a few facets of this friction -- adds anything to the quality or quantity of patient care.

Of course, the answer is zero. It adds nothing but expense. This reality is the basis of various estimates that roughly 40% of all our $2.5 trillion in health care expenses is either useless paper-shuffling or outright fraud (for example, it has been estimated that 40% of Medicare’s cost is fraud). If we also subtract malpractice and related costs (very low in single-payer systems), enormously expensive medications that either interact unpredictably with other medications or simply don’t work for the majority of patients, and the opaque but very real costs of practicing defensive medicine, then we can guesstimate that another 25% of the nation’s ballooning health-care costs is essentially counterproductive friction. Thus two-thirds of the nation’s sick-care costs are friction.

The Sapping Costs of Economic Friction

In industry after industry, we find that instead of market forces, the friction-costs of cronyism, regulation, and gaming the system dominate the cost structure. Thus the pharmaceutical industry spends much of its resources on marketing, not drug discovery (as it touts in its ubiquitous marketing campaigns and lobbying). The Pentagon-defense industry, cozy home to one of the world’s most infamous revolving doors (top Department of Defense employee one week, chief lobbyist for a “national defense” contractor the next week), manages to build fewer aircraft and ships for ever-greater sums of treasure. Where exactly are market forces at work in this incestuous relationship? Does the Pentagon ever get a bid from a South Korean ship maker, for example, or issue an RFP (request for proposal) that doesn’t weigh almost as much as the weapon being procured?

The sources of friction can be found not just in what’s visible, but in what lies beyond our line of sight, purposefully hidden by highly selective, limited choices. This is the essence of the crony-capitalist, Central State/cartel “capitalism” that dominates the US economy. The choices of efficiency/reduced friction are not just unavailable; they are ruthlessly eliminated by all those concentrations of power which profit from monopoly, state control, and the domination of cartels.

To mention another example from health care, ours is supposedly a “free market” system, but try getting bids in your locale for health insurance and you will find that two or three providers are all that’s available. Is that evidence of a healthy free market? If so, why does it look, feel, and act like a cartel?

For a real-life metaphor for this system of limited choice and competition, we might imagine someone who wants to lose weight being offered their choice of fast-food from the national chains. Is a choice between a greasy taco and a greasy burger, or between two salads of iceberg lettuce drenched in fatty dressing, really a choice?

Many Americans are beginning to realize this same non-choice defines the two political parties. Both are for sale, and both defend the Status Quo at every turn. The only difference between the two is the nature of the payoffs and “sweeteners” paid to their various constituencies -- and in the shrillness of their propaganda.

Which is better, Bud or Bud Light? Wow, what a choice.

The self-serving elites who profit from all this carefully structured and highly profitable friction do not see it as wasted energy, of course. To them, it’s “the way things work” or “the cost of doing business.” The same is true in all deeply corrupt economies -- the bribe in India or China is also “the way things work” and “the cost of doing business.” The elimination of competition via Central State regulations that create unproductive “profit centers” is indeed “the way things work” in America, but the question now is whether a system that is largely friction is sustainable.

The Laws Of Physics Apply to Economies, Too: There Is No Perpetual Motion Machine

Right now, the US is maintaining its vast system of unproductive friction by borrowing 11% of its gross domestic product (GDP) every year, a level that is roughly four times what is considered sustainable. Though in the popular view, this money is being “printed” by the Federal Reserve (a private monopoly protected by the Central State), the money is all borrowed, and thus it requires servicing in the form of interest payments that will continue to burden future taxpayers. In effect, we are simply borrowing from our children and grandchildren. That is a high cost to maintain the friction imposed by a bloated, perversely inefficient, and supremely self-serving Status Quo.

Interest itself is a kind of friction; by making our entire economy dependent on ever-rising debt loads, we have created a source of friction that will eventually freeze the machine.

By borrowing US dollars into existence, our nation is currently able to buy the energy needed to overcome the vast friction generated by this system of interlocking State fiefdoms and private cartels. Even if our ability to borrow money into existence is unlimited, the same cannot be said of oil exporters’ future willingness to accept paper money in trade for their dwindling resources of petroleum.

Paper money can be printed or borrowed into existence in unlimited quantities, but the same cannot be said of fossil fuels. Yes, there is a lot of it still around, but we don’t control much of it directly, and it is priced, like all things in a truly free market, on the margins. Modest scarcity can drive price up very immodestly. And scarcity need not be physical; if the political will to sell us petroleum becomes scarce, so, too, will petroleum.

All of which says the obvious: A system burdened with unproductive friction is running not just on borrowed money, but on borrowed time. All sorts of things could limit the amount of energy we have on hand to push a machine so gummed up with friction. Unlimited money becomes, well, free (worthless), or those with the dwindling resources might choose to fuel their own friction rather than ours.

The point here is that systems burdened with enormous forces of friction are exquisitely vulnerable to any reduction in the energy needed to maintain them. Once the value of the actual output drops below the cost of maintenance, then the system freezes up within a remarkably short time. Borrowing 100% of our entire economy every nine years just to fund those benefiting from gargantuan friction is not as sustainable a path as the Status Quo is promising.

Though financial friction is already sufficient to freeze the machine, Germany-based correspondent Eric M. notes that there are additional sources of friction in the system:

I would like to add the notion of “idle power”, also apparently called “reactive power” in electro-engineering, in English. In German, it’s called “Blindleistung” (blind power) – a terminology I actually prefer, because it underlines what this power is about.

You find this power almost anywhere where electricity is transported, and the goal is to minimize this power, because it serves no purpose and only requires electric cables that are thicker than if that power was not produced. All that this power does is to bounce back and forth between the ends of the electric cable (electricity producer and consumer), without being actually consumed (e.g. for heating, by motors, TV, etc.).

In addition to this blind power, there is the dissipated power, due to electrical friction (“resistance”), which you are covering in the article.

But many economic activities don’t only generate friction (power that dissipates as uncontrolled heat), but also they produce significant blind power. In other words, they are useless and could be eliminated if intelligent decisions were made. One example is a huge part of the welfare (money distribution/rotation system – at least in Germany) – in particular the case where I pay taxes and social insurance and receive a part, or all of it, back via some government subsidies.

Another example is the insurance industry in the US around identity theft. If the US introduced the idea of identity cards across the country, it wouldn’t be possible any longer to abuse other people’s social security number for false identification. Last but not least the many lawyers who, in a global context, to some extent serve the purpose of rotating money between corporations, such as in the context of patent litigations. They earn money for this, and that represents the frictional part.

But even if they didn’t earn money at all, that work still represents opportunity costs (because their brains are not assigned to doing something productive), and that is the aspect of blind power.

Concerning friction within the economy: other examples are frequent traffic jams, long trips to the office, etc.

I’m pretty sure that in the US economy, there is much more blind/idle power than friction. That needs to be reduced, as you discuss. The people currently working in this useless idle-power economy should be moved into the useful economy. The useful power is called “Wirkleistung” in German and “active power” in English.

All this leaves us each with a highly subjective and eventually meaningful question: Are we part of the friction, or are we part of the productive machine? There is no laser-cut line between the two, of course, but we might fruitfully ask which parts of our job, work, and life will still be productively in place if the machine freezes up and the unaffordable friction all gets sloughed into the garbage bin of history.

In Part II: The Transition To A Post-Friction Economy, a special Chris Martenson.com report, we study how enterprises and work opportunities will evolve as the unproductive “friction” segments of our economy devolve or freeze up - along with a forecasted timeline for when this transition begins in earnest. Click here to access Part II of this report (free executive summary; enrollment required for full access).

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